According to the Florida Supreme Court, an attorney’s activities fall under ethical disclosure rules whenever he participates in a business transaction with a client, even if he’s not a principal (for example, buyer or seller) in the transaction. In The Florida Bar v. Doherty,1 the Florida Supreme Court disbarred an attorney for attempting to sell annuities to an elderly client without notifying the client in writing that the attorney would receive a commission in the transaction. Although many of us would never broker the sale of annuities to our clients—especially after the Glenn Neasham affair!2 — The Doherty decision reminds us that there’s a broad range of activities that may require written disclosure and written consent under the ethical rules governing business transactions with clients.

What Happened?

Brian Doherty was a Florida attorney who also provided financial planning and investment services to clients and was licensed to sell certain investment products, including annuities. In July and August of 2006, Doherty applied to purchase annuities on behalf of his client, an elderly widow. If the transactions had proceeded, Doherty would have received a 7 percent commission, which would have been applied against a debt that Doherty owed to the annuity provider. Further, it appears that Doherty deliberately chose to apply for annuities whose commissions he wouldn’t forfeit if the client died during a “chargeback” period. As it happened, the client died on Aug. 19, 2006, before she could purchase the annuities.

The referee who reviewed the matter recommended that Doherty be found guilty of violating two of the Rules Regulating the Florida Bar. The first was Rule 4.17(a)(2), under which an attorney may not represent a client if there’s a substantial risk that the representation will be materially limited by the attorney’s personal interests. Doherty didn’t challenge the referee’s recommendation under that rule. However, the referee also recommended that Doherty be found guilty of violating Rule 4-1.8(a), relating to business transactions with clients. Doherty challenged the second recommendation, arguing that the rule was inapplicable in his case.

Rule 4-1.8 states that an attorney shall not “enter into a business transaction with a client” unless the transaction is fair and reasonable to the client, the attorney discloses to the client in writing of the terms of the attorney’s interest in the transaction and the desirability of the client seeking separate counsel in the matter and the client gives informed, written consent. The Florida Rule closely parallels rule 4-1.8(a) of The American Bar Association’s Model Rules of Professional Conduct.

In his defense, Doherty didn’t assert that he gave the written disclosure or received the written consent required under Florida Rule 4-1.8. Rather, he argued that his role as a broker in the proposed annuity transaction didn’t constitute engaging in a business transaction with the client, because Doherty wasn’t a principal in the transaction—he wasn’t selling anything to her or buying anything from her. The court, however, rejected Doherty’s narrow interpretation of the rule.

Court Ruling

The court held that Rule 4-1.8 “encompasses a scope of dealing broader than simply those between a lawyer and his or her clients as the principals to the transaction.” The court cited a number of examples in prior Florida cases, such as an attorney investing in a company that was in direct competition with his client’s company, an attorney taking over his client’s role as chairman and CEO and an attorney making a secured loan to a client. The court also cited a case in which the Ohio Supreme Court held that providing financial planning services to a client constituted engaging in a business transaction with the client and, thus, required written disclosure under Ohio’s Code of Professional Conduct.

The referee and Florida’s Supreme Court threw the book at Doherty because of some egregious aggravating factors. Doherty wrote himself into the client’s estate plan as personal representative and trustee, and the estate planning instruments were written to grant the trustee authority to purchase annuities only from the annuity providers to whom Doherty owed money. Further, Doherty had previously been suspended by the New Hampshire bar for two years.

Lesson Learned

Despite these special circumstances, however, it’s important not to lose sight of the decision’s central point: An attorney who participates in any capacity, other than as legal counsel, in a business transaction involving a client should play it safe and follow the same disclosure and consent rules that would apply if the attorney and the client were principals in that transaction. This includes those attorneys daring enough to provide financial planning services to their clients—especially if they will receive a commission or other advantage from a client’s decision to pursue a particular investment.

Endnotes

This is one of the reasons why we, at The Ultimate Estate Planner, Inc., have put together various programs and products, as well as provide individual business coaching, in the area of developing successful referral relationships. Ultimate Estate Planner President, Philip Kavesh, has successfully built a multi-disciplinary practice utilizing affiliated financial advisors for over 20 years. He is licensed as both an estate planning attorney and financial professional and he legally and ethically does this referral process with his law firm clients on a day to day basis. He shows you how and even provides you the tested and proven forms for this referral process in his program entitled, Successful Referral Relationships that Actually Work!.

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